evaluated along four dimensions, customer efficiency, the quality, our ability to

provide choice of the customer and responsiveness.

Now as the owner of a business of course, I would love my operations to excel at all

four of these dimensions. I would love to provide customers with

products at low prices, provide them with infinite choice high quality service and

all of that immediately provide them the product and services when they want.

Obviously, that is often not possible. As the owner of the business, as a

manager, as a consultant, I have to make tradeoffs among these four dimensions

which is really what we're going to be discussing in this session today.

Let's look at a specific example. Imagine your consulting for a call center.

The call center currently has problems with response times, customers are waiting

a long time and only 30 percent of the incoming calls get served in twenty

seconds or less. Say for sake of argument that your goal is

to improve this and get 80 percent of the calls serviced in twenty seconds or less.

This is called a service level and we will talk more about this later on in this

course. Now, there's a tension between the forces

of responsiveness and productivity in the sense that you could easily imagine a call

center that would have an amazing responsiveness.

It would have thousands and thousands of employees staffed.

It would be very inefficient, but it would be very responsive.

Visa versa you could imagine downsizing the workforce so that you have very few

workers answering calls which would be great for your productivity but very poor

for your responsiveness because there's clearly a trade off between those two

dimensions but one of the things that we've discussed in this course is how you

can use the operation into tools in this course to really position yourself on this

graph because every business needs a different position in terms of service

level and the managerial decision is how many employees would you want to hire on a

given shift. Next, imagine that you're going out.

You're working for this call center and the call center is performing about here

in terms of the responsiveness and the productivity.

You engage in some benchmarking and you're looking at the number of other industry

players along the lines of responsiveness and productivity.

First company that you run into is Company A.

Company A you notice is a lot more responsive than you are.

So, in other words, the customers have to wait less.

But at the same time you notice that they are a lot less, a lot less efficient.

Then you run into company B. Now, these guys here are having a much

better productivity but they do this at the cost of the responsiveness.

So they are cheaper than we are, but they are a lot slower.

Both of these make good sense, because they are really reflecting the tradeoff

that we just discussed on the previous slide.

Now the next company you run into is competitor C.

And competitor C is a puzzle for you really because these guys are both faster

than we are and they are cheaper. We refer to this difference here as the

inefficiency in our operation. And the line that goes, let me say this

casually. The line that includes all the industry

players to its lower left we refer this as the efficient frontier.

Obviously, the goal of an operation is to move our tier to the upper right of this

graph. Now an operation that is currently on the

frontier in order to move to the upper right here, it has to innovate and shift

the frontier. Everybody else who is off the frontier has

a potential to simultaneously improve along multiple of the four dimensions of

operational performance without having to make necessarily a sacrifice.

These are guys that are just doing the work smarter.

Now one of the things we are going to talk about in this course is we'll help you

evaluate such changes be it on the frontier, to a new frontier, or off the

frontier towards more productivity and more responsiveness.

We'll help you evaluate these changes before you actually make them.

Making these changes is expensive and so to the extent hat you can evaluate the

financial impact before embarking on them, you'll have saved yourself a lot of

headache. Now it's time to look at a specific

example. What I've shown on this graph is data from

the US airline industry, and I plot here on the X axis the efficiency of the

carriers, as measure by the ratio between the traveled miles that they provide

relative to the operating expenses. I also measure on the Y axis, and I'm

going to just call it the yield of the airline which takes the ratio between the

miles of travel service provided by the airline, relative to the revenue.

Now, take a look here at this concept of the efficient frontier.

We see a line that roughly looks like this And that captures basically all of the big

airlines along a pretty linear line. The interesting outlier on this graph is

Southwest Airlines. Southwest has been able to achieve a much

higher productivity compared to the big legacy carriers and thereby has been able

to shift the frontier largely done because of their clever labor productivity,

something that we will wish to analyze later on in this course.

You also notice how Hawaiian Airline has been able to achieve a similar

productivity largely because of their small route network.

But has not been able to command the high prices relative to southwest.

Now this is data from 1996. It's interesting to contrast this data

with the year 2011. In 2011, you notice that the frontier has

changed very dramatically. In fact, Southwest that has been playing a

[unknown] game, relying on low pricing has emerged as actually an airline that has

been able to charge the highest prices in the industry.

Yet they had to sacrifice on the productivity side.

And they've been overtaken on the productivity side by company such as

Jet-Blue and Virgin America. So you notice how the frontier in the

industry has shifted. New business model has, have arrived,

companies have played different strategies.

And because of their operations, the industry landscape now is a very different

one. All right, what have we learned today?

First of all we noticed that you cannot have it all.

Just like in normal life we have to set priorities.

A business has to prioritize some of the four dimensions of operational

performance. Cost, quality, variety and responsiveness.

You have to decide on which of these four dimensions you want to compete.

Second, we talked about the concept of the efficient frontier.

I've casually defined the efficient frontier as a line that includes all firms

to its lower left. That was arguably a quite casual

definition. More formally, in academic terms, we talk

about the line of firms that has no other firm that further dominates the firm.

That is, for example, cheaper and faster at the same time.

The efficient frontier is important as our gap as in the company to the frontier

measures the inefficiency, the waste that we have in our operation.

One thing that we will talk about in this course is to clever operations through

clever process design we will help your firm to move up towards the frontier.

And then once you're on the frontier, we'll have to continually innovate to keep

on pushing the frontier to the upper right off the graph.